Eurobonds: yield, overview of offers on the market, pros and cons

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Eurobonds are securities denominated in foreign currency for the issuer.

The issuer is the state or company that issued Eurobonds.

For example, a certain Russian company issues bonds in rubles and dollars.

For dollar bonds, the payment of income to holders will be made in dollars. The main feature of Eurobonds is the yield and the repayment is paid in dollars.

Eurobond main properties

Eurobond is a broker's slang term for a Eurobond. It has all the characteristics of an ordinary debt paper:

• nominal value, which is determined by the issuer and indicated by the corresponding sign on the bonds;
• coupon income - means the amount that is the annual income of the Eurobond holder, the yield is paid by the issuer;
• Eurobond validity and maturity date determine the time of receipt of coupon income and return of face value;
• the market value of the Eurobond may differ from the face value upwards or downwards, while the coupon income does not change during the entire life of the Eurobond;
• current profit figures depend on the market value of the Eurobond, the profit from which is calculated as a percentage as an annual in relation to the volume of capitalized funds;
• another feature of a Eurobond is the yield to maturity, defined as the average annual yield in percent, provided that the holder owns the security until full redemption (at whatever price the bond is purchased, the holder will receive the face value from the issuer).

Investments as a way to save money

Eurobonds have become a popular type of investment in the Russian market.

Yield from Eurobonds in Russia may be several times higher than income from deposits.

The minimum price of a Eurobond is one thousand dollars, however, on the exchange, securities are traded in packages (lots) of one hundred, two hundred pieces.

Since 2015, the Moscow Exchange has been allowed to split the sale of lots, which makes it possible to invest affordable amounts for a wide range of investors. An individual can purchase Eurobonds only through a broker.

The yield of Eurobonds of Russian companies is formed in two forms:

• coupon payments for securities holders;
• speculative operations designed to change the quotes of a security and, as a result, its market value.

Money to money, or Eurobond yield calculation

Additional advantages that distinguish the yield on securities from bank deposits are:

• increased yield compared to foreign currency deposits, 4-5% higher;
• liquidity of Eurobonds, that is, the possibility of a quick sale without losing ACI (accumulated coupon income), which makes the bond more expensive;
• if necessary, it is possible to sell part of the bonds;
• fixed income on coupon payments, the size of which is higher, the longer the maturity of the Eurobond;
• Pay coupons up to twice a year.

In fact, deposits in Eurobonds of Russian issuers and the yield on them is a good protection against the depreciation of the ruble, with a sharp fall in the exchange rate, you can make a profit in terms of rubles

Risks of securities holders

Investing in Eurobonds and yields are not always friendly. There may be objective risks faced by the holder of securities. These include:

• Default, in which the issuer does not fulfill its obligation to pay. For example, a major Russian transport group defaulted in May on Eurobonds maturing in 2018, after which its rating fell by several points, and the bonds lost value.
• Holders of subordinated Eurobonds in the event of the issuer's bankruptcy receive payments last, and therefore the price of securities may fall several times.
• Changemarket prices, which are especially susceptible to securities with a long circulation period, when it can periodically sag or rise. The main thing is to meet the maturity date and get all the money, in case of an early sale, you can incur losses.
• The "lot size" problem is a set of classic investor mistakes related to the purchase of Eurobonds. The problem of "lot size": buy the entire Eurobond. This may require, for example, $200,000. If a client has $10,000 with him, only a part of it can be sold to him, and ownership of the Eurobond does not arise at that moment. In addition, when choosing this method of investment, the inevitable taxation of the coupon occurs, which the client often does not suspect. With investments in OFZ (federal loan bonds), this would not have happened: on the horizon of three years there is a so-called benefit for long-term ownership of securities, or, in other words, a three-year benefit.

Investment attractiveness of the Russian securities market

The level of quotes and prices for Eurobonds of Russian issuers, the yield and growth prospects of the investment market are expected in the short term in the area of medium-term Eurobonds with base rates. A smooth growth in investments of corporate Russian issuers is also planned.

Against the backdrop of highs from long-term and medium-term OFZs and the depreciation of the real estate market, an increase in the yield of Eurobonds of Russian companies is expected. This causes the interest of individuals and organizations to invest in corporate bonds with a short term.repayment and stable coupon.

Three options for the possible purchase of Eurobonds are available for a private investor:

1. Self-purchase through the trading terminal. To do this, you need to conclude an agreement with an exchange broker, gain access to your personal account, replenish your account and, having gained access to trading, make investments. Cost from a thousand dollars.
2. Purchase through ETFs (exchange-traded funds) of Eurobonds, this fund includes dozens of large Russian issuers - Gazprom, Rosneft, Sberbank and others. The ETF share is available at a price of 1,500 rubles.
3. Buy mutual funds that are similar to ETF shares. The purchase of shares is done through the management company and the conclusion of contracts with it.

Where can I see Eurobonds available for purchase?

The list of Eurobonds that are relevant and available for purchase can be seen on the MICEX website (Moscow Interbank Currency Exchange).

It is better to buy shares with a minimum lot content. For example, a Gazprom lot is traded in one hundred bonds, given that one Eurobond costs a thousand dollars, the buyer will need 100 thousand dollars.

You can also see traded Eurobonds on the broker's website or in the terminal.

Here's what the private investor needs to consider:

• Price of the bond package.
• Choose the smallest package to take advantage of tax preferences and get a legal advantage by buying the entire lot.
• Find suitable Eurobonds fromcalculation one bond - one lot.
• Buy Eurobonds on IIS (investment-individual account), with the possibility of further tax deduction, which is 13% of the investment amount.

• Take into account the size of commissions and possible taxes, which can significantly affect the profitability of shares. This is especially true of hidden fees and unaccounted taxes. For example, the yield from the difference between the purchase discount and redemption of a bond is regarded as additional profit and is taxed. The general taxation of Eurobonds is 13% of the income (except for Eurobonds of the Ministry of Finance, no tax is levied on the coupon income of shares of the Ministry of Finance of the Russian Federation).
• Don't rush to buy. Compare all the pros and cons of investing.
• The broker independently withholds taxes, and the coupon comes to the investor minus taxes.

Actual navigator for Russian Eurobond issuers

Eurobonds in Russia can be roughly divided into two main groups.

• State. Government bonds issued in foreign currencies. There are currently thirteen issues with different maturity, face value and coupon payments.
• Corporate Eurobonds of the Russian Federation promise a higher yield than government issuers, from 2 and above 10 percent per annum. However, the increased rate is offered by issuers of the "second" level, not the largest banks. The more state ownership in the assets of a Russian issuer, the lower the yield on Eurobonds, which is still fixed higherprofit from deposits in foreign currency deposit accounts.

Eurobonds are not always issued in dollars, the denomination can be in euros, Swiss francs, Australian dollars, Chinese yuan and other currencies. Annual payments are paid in the same form of currency.

The difference in the annual income of corporate issuers

As already noted, the annual percentage of yield on different stocks can fluctuate in fairly large ranges. Here are some examples:

• The Eurobond of the Gazprom corporation with a par value of 1000 euros and with the maturity of the security in April 2018 had a low yield. The coupon was paid once a year at a rate of 2.933% per annum.
• Eurobond "VTB Bank - 40-2018-euro" with a face value of 5000 francs - with a coupon of 2.9% per annum.
• Lukoil Corporation promises higher yields on bonds maturing in 2022. The coupon is paid twice a year at the level of more than 6%.

However, for a holder of securities, such a yield on Russian Eurobonds is still higher than depository placement of money.

Time works to increase income

As a rule, the longer the maturity of a security, the higher its yield. Thus, the Gazprom Corporation promises a return of more than 7% on Eurobonds with a circulation cycle of 30 years, the bond face value is also available to a wide range of investors and amounts to $1,000.

In the range of 5-10% per annum, you can find bondsfamous and top issuers:

"Sberbank-09-2021" - these are Sberbank Eurobonds, the yield on which is promised at 5.717%. Eurobonds with a par value of $1,000 will be redeemed in mid-2021

Who is the most generous?

The investor is also offered higher returns on securities. Some Russian issuers are increasing both the percentage of annual payments and the number of coupon payments per year.

• Promsvyazbank pays 10.5% coupon income to owners of its Eurobonds maturing in 2021.
• Opening Financial Corporation offers Eurobonds maturing in 2019 at 10% per annum. Currently, securities can be purchased for 75% of the face value of $1,000.
• Tinkoff offers its investors the highest annual returns. The yield on "Tinkoff" Eurobonds is determined at 14% per annum, the coupon is paid twice a year. The nominal value of the Eurobond "Tinkoff Bank-2018" is $1,000, maturity ends in 2018.

How not to miscalculate?

After registering and opening an IIS on the MICEX exchange, the broker can offer the investor various investment programs.

This can be multi-currency baskets, as well as various options and a combination of essentially multi-currency deposits, such as futures transactions, with purchases of Eurobonds to protect the securities holder's investment from currency fluctuations.

The private investor needs to consider the following:

• SizeThe face value of corporate Eurobonds ranges from USD to USD 500,000. Basically, the cost of a Eurobond issued by Russian issuers is $1,000.
• The yield on securities ranges from 5 to 10%.
• The issuance of $1,000 lots is usually limited, and the choice is not so wide, so an investor who wants to profit from coupons should count on investments from 1.5 million rubles, and preferably 5, which are a multiple of 100 thousands of dollars and enable the holder to have a full Eurobond lot.
• The advantage of Eurobonds is their liquidity, but in critical situations it is not always possible to sell bonds ahead of schedule at par.

• The longer the maturity of the security, the higher the yield, without waiting for the bond to be redeemed, the investor usually loses income.
• Investments often involve the risk of force majeure.
• Individuals cannot always purchase the lot they like, there are various restrictions that a professional broker will advise about.

Success formula

The Russian investment market is attractive to private investors, especially Eurobonds, which promise higher yields than deposits to deposit accounts.

With the real estate market undergoing crisis and stagnation, Eurobonds enjoy increased success.

However, the overestimated expectations of a private investor may not be justified for a number of objective reasons: a change in the key dollar rate,problems with security ownership, bank commissions, low diversification of securities.

When purchasing Eurobonds, using this tool to strengthen and increase equity capital, maximum transparency of the transaction is required. Prepare a foothold for retreat in case of extreme risks.

It's possible, the Russian market offers various instruments for regulating and managing Eurobonds.